What is a Home Appraisal and Why Do I Need One?

     The most common type of appraisal is a market value appraisal. This type of appraisal is based on what the appraiser thinks the property is worth as of the date of the inspection. The value is based on area sales data. Some typical uses for market value appraisals are:

To buy a house (typically you need an appraisal for the mortgage)
To lower the taxes on your home or property
To determine the replacement cost for insurance
To settle an estate
To provide a negotiating tool when purchasing real estate
To determine a reasonable price when selling real estate
To get paid market value in a condemnation case
To satisfy a government agency requirement such as the IRS or your State Taxing Agency
To use in a lawsuit

To buy a house
     Purchasing a home is one of the largest investments most people make. You do not need an appraisal if you are paying cash for a home. Most people have a mortgage and therefore need an appraisal to obtain the mortgage. You don’t need the appraisal, the lender needs the appraisal to show the mortgage company that they are lending money to you on a home. The loan amount can’t be more than the market value of the home. The lender is the client on the appraisal report even though you pay for the appraisal. You are entitled to a copy of the appraisal report and should always ask for a copy.
To lower the taxes on your home or property
     The assessor’s office appraises your property for tax purposes.  The Assessor is interested in equity among tax payers and therefore uses a mass appraisal concept for appraising your property for taxes. If you look at your assess value on your tax bill and the assessed value is more than the homes in your area are selling for, you need an appraisal to prove that your property is lower in value. Other things to look for are, Is the square footage of your home smaller than what the assessor has on file? Do they have a pool assessed for your property and you closed the pool and buried it several years ago? These items are just some of the things to look for when determining if your taxes are too high. If you think your value is too high, order an appraisal and protest your taxable assessed value. Each County has its own procedures and timing. Contact your local assessor to determine the assessed value and how it is done.

To determine the replacement cost for insurance
     This is really important if your home is more than 5 years old.  Most insurance companies quote current market value. As a homeowner, you want the replacement cost insured, not the market value. When an appraiser does an appraisal s/he determines what it costs to replace the home and then depreciates the value using the cost approach. Use the un-depreciated replacement cost for insurance. If you use market value to insure your home, then you only get the value of the home today. You will not be able to rebuild your home with insurance money! The insurance will pay off the mortgage and their might be some extra for you. Most of the time there is no additional money for you the homeowner and all of your equity disappears if there is a fire or flood. Insurance is designed primarily for the mortgage lender.
     Property owners also may need appraisal to contest the annual appreciation increases mandated by some insurance companies, particularly when the increase in the insurance coverage results in increased premiums.
To settle an estate
     Most estate appraisal are ordered by attorneys.  Federal (IRS), State and local taxing authorities often require appraisal to establish the value of an estate when a death occurs. The heir or survivor generally wants a conservative value estimate that limits their tax liability.
To provide a negotiating tool when purchasing or selling real estate
     An appraisal gives you a solid place to begin negotiations. The supporting data is in the appraisal for you to bargain with the other party.  If you are buying a home and the appraisal is lower than the asking price, have your realtor present the data to the seller and show them that the home is worth less than the asking price. (If you are in a rapidly increasing market, where demand for homes is greater than supply, then this concept does not work.)
To be paid market value in an eminent domain or condemnation case
     Roads, utilites and flood control structures are all uses that go to the public. When a Government agency needs land for a public use, the agency has the right to condemn the land for public use.  This is a constitutional right. However as the landowner, it is your constitution right to be paid for the property. Government agencies are required to pay market value for property that they acquire for a public use. The market value must be established by an appraisal report. If the land owner believes the value is too low, it is beneficial to get another appraisal from a different appraiser. It makes the owner’s negotiating position stronger and another appraisal gives the government agency a reason to move their value up if necessary. NOTE: This is a highly specialized field that usually requires testimony before a court. Hire competent appraisers with expertise in this field.
To satisfy a government agency requirement (i.e. Court, IRS or your State Taxing Agency)
     Taxing has been discussed above. The other reason to get an appraisal is in a court case. Divorce court is the most common.